FIN+3403+-+Summer+2006+-+Sample+Problems+for+Exam+1+Topic+Review

FIN+3403+-+Summer+2006+-+Sample+Problems+for+Exam+1+Topic+Review

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Sample Problems for Exam 1 Topic Review Page 1 of 9 Pages Chapter 6 10. You are given the cash flows listed below at Year 3 through Year 6. Assume that the appropriate interest rate for these cash flows is 12%. Determine the equivalent value of these cash flows at Year 10. Year Cash Flow 3 $100 4 $350 5 $200 6 $450 A. $2,131.73 B. $2,187.82 C. $2,064.17 * D. $1,972.46 E. $2,214.39 CF 0 = $100.00 CF 1 = $350.00 CF 2 = $200.00 CF 3 = $450.00 I/YR = 12% Solve for V 3 = $892.24 Solve for V 10 = ($892.24)(1.12) 7 = $1,972.46 __________ Alternatively, V 10 = ($100)(1.12) 7 + ($350)(1.12) 6 + ($200)(1.12) 5 + ($450)(1.12) 4 V 10 = $221.07 + $690.84 + $352.47 + $708.08 = $1,972.46 20. Assume that you have been offered an investment that pays $450 at the end of every 6 months for the next 5 years (10 payments). The nominal interest rate is 12 percent; however, interest is compounded quarterly. Determine the present value of the investment. * A. $3,297.96 B. $2,983.47 C. $3,404.20 D. $3,152.84 E. $3,363.16 In order to discount the cash flows properly, it is necessary to find the effective semi- annual rate:
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Sample Problems for Exam 1 Topic Review Page 2 of 9 Pages i NOM = 12% m = 4 i PER = 3% Effective semi-annual rate = (1.03) 2 - 1.0 = 6.09% Find the PV as: N = 10, I/YR = 6.09, PMT = 450, Solve for PV = $3,297.96 21. Assume that you opened a savings account today and immediately put $5,000 into it. You plan to contribute another $10,000 one year from now, $20,000 two years from now, and $20,000 three years from now. The savings account pays an 8 percent annual interest rate. If you make no other deposits or withdrawals, determine how much you will have in the account 10 years from today. A. $111,743.38 * B. $102,079.76 C. $104,284.92 D. $109,148.18 E. $106,823.64 The easiest way to find the solution to this problem is to find the PV of all of the contributions today, and then find the FV of that PV 10 years from now. Step 1: Calculate the PV of all the deposits today: CF 0 = 5000 CF 1 = 10000 CF 2 = 20000 CF 3 = 20000 I = 8 Solve for NPV = $47,282.68 Step 2: Calculate the FV 10 years from now of the PV of the deposits: N = 10, I = 8, PV = -47,282.68, Solve for FV = $102,079.76 32. Assume a $150, 7-year annuity, where the first payment will take place at Year 37 and the last payment will take place at Year 43. If the appropriate interest rate to use is 10 percent, determine the value of this annuity evaluated at Year 50. A. $2,829.55 B. $2,660.41 C. $2,716.79 * D. $2,773.17 E. $2,604.03 Treating as an Ordinary Annuity - Set Calculator to END of Period :
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Sample Problems for Exam 1 Topic Review Page 3 of 9 Pages N = 7; I/YR = 10; PMT = 150; Solve for PV 36 = $730.26 N = 7; I/YR = 10; PMT = 150; Solve for FV 43 = $1,423.08
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FIN+3403+-+Summer+2006+-+Sample+Problems+for+Exam+1+Topic+Review

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